Af-Pak insecurities and investment in the region

The challenges to India’s growth come more from the stalled economic liberalisation process than from the Af-Pak situation

Yesterday, Sarika Malhotra, a journalist from Financial Express asked me for my views on the regional security situation and the impact on investment. Here’s the exchange:

How do you think concerns regarding terrorism and political violence in AfPak, India, Sri Lanka are causing businesses to avoid investing in politically sensitive areas?

First of all, I think considering Af-Pak and India in the same breath is incorrect. Af-Pak has deep structural problems. Part of the Af-Pak problem affects India, but it’s relatively minor and not on the same scale as the “Af-Pak problem” itself.

Investors will respond to two cues: the fundamentals of the economy in the medium- to long-term and the political risks in the short term. So the impact on investment in India & Sri Lanka will be different from the impact on investment in Pakistan & Afghanistan.

In India’s case, the economic crisis and its aftermath suggest that to the extent that the Indian government competently manages economic policy, foreign investment will continue to flow into India. India is far more attractive—despite concerns over security—than many other developed and emerging economies.

Also, after almost two decades of India’s opening up to foreign investment, the world has come to better understand the political risk ‘norm’ in India. A decade ago, a travel advisory by the US State department would have panicked investors. Today it doesn’t matter as much.

Pakistan is in a negative spiral. The greater the political instability there, the greater will be the movement of wealth and people out of the country.

Conflict and instability are significant barriers to foreign direct investment—how do you view this? If you could cite some companies who have stopped their plans owing to the instable conditions in AfPak, India?

I haven’t heard of any company which have stopped their plans due to instable conditions in India. What has caused problems is the issue of land acquisition and labour reform—these are old bugbears that the presumably reformist-minded prime minister has forgotten about. SEZs, even done correctly, are not a solution.

Far more than security risks, it is the inability of the Indian government to ensure a robust property-rights regime and liberalise labour laws that drags down investment (both foreign and domestic in India)

How much of a business loss is India incurring owing to this?

I do not have estimates.

What conflict sensitive business practices can help in this regard?

The short-term response is for companies to go in for an intelligent mix of self-provisioning and co-operating with the government towards improving security of their operations, personnel and commercial interests.

But this should not be seen as an end in itself: unless corporate India consistently pressures the government to improve the overall quality of governance—including economic liberalisation, implement the Supreme Court’s order on police reforms and modernise the armed forces—both investments and returns on investments will be lower than they might otherwise have been. What this means that the competitiveness of the Indian economy will suffer. It is important for Indian corporate to compel the government to do its job, rather than substitute for it by private provisioning as has been the case in recent years.